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Hoisington Investment Management Q1 09 Outlook


Grenville
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What's your outlook for the next decade?   

60 members have voted

  1. 1. What's your outlook for the next decade?

    • Inflation
    • Deflation
    • Flat
    • No idea


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The Hoisington Investment Management Quarterly Review and Outlook for Q1 2009 has been posted.

 

The report paints the picture for deflation as the velocity of money outpaces helicopter Ben's work. The shadow banking system's failure continues to pressure velocity.

 

They continue to favor bonds.

 

Good read. Added a poll as well.

 

http://www.hoisingtonmgt.com/pdf/HIM2009Q1NP.pdf

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What is the least expected outcome with most people? Deflation. I like reads like Hoisington because nobody believes it will happen (including Prem!).

 

Clearly, what is happening right nos is MOST SIMILAR to what happened in '29 and during Japan's '89 crisis. Why do we not expect a similar protracted (10+years) of pain? Why do we think the government has the power to change things? Didn't work in Japan!

 

My dilemma is Buffett  clearly is of the opinion that all this stuff being done by the Fed/Treasury/Gov't will be inflationary at some point... 

 

If I had to make a call today, I would vote for deflation (actually, I did! Thanks Grenville)!

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My thesis is based on the simple fact that Baby Boomers need to retire.

 

With most of their assets in stocks and housing, I think we can expect the government to do everything in its power to inflate those asset classes.  V is in part a function of perceived wealth, create another bubble in either stocks or housing and you will see increased velocity.  Its not the healthy solution but its politically convenient.  I can't speak for all stocks, but if you pay book and book is compounded at 14% there is no way a 3.5% treasury will perform better over time (Maybe if Brian Bradstreet is doing his thing). 

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Interesting read, thanks for linking it to the board.

 

Hoisington's article is interesting and thought-provoking.  However, I wonder whether he is not just a little bit late in making proclamations about the future performance of treasuries vis-à-vis equities.  The examples he provided represented time periods from shortly before the market peak all the way down to the market trough (ie, 1928 in the US and 1988 in Japan were nearly the peak).  Presumably at those times, treasuries were "cheap," meaning that they had a half-decent yield.

 

During the month of March 2009, we were down by more than 50 percent from the market peak...which either occurred in 2000 or in 2007, depending on your perspective.  Treasury yields are in the toilet and have been there for several months.  IMO, you cannot compare 2009 to 1928 or 1988 because much of the bad news for equities has already occurred, as has the flight to treasuries.  You might, however, reasonably compare 2007 to 1928 or 1988....

 

In essence, I would argue that we are at least in the 2nd or 3rd inning of this game....and equities gave up a big pile of runs in that first inning.  At this point, predicting that treasuries will outperform equities over the next 6 or 7 innings strikes me as a risky assumption....I'd say we should look for late inning heroics from equities, probably in 4 or 5 years.

 

SJ

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It never ceases to amaze me how many smart people and economists are always referring to the history as a justification for the future. I mean I believe in that article there are direct comparisons between the Great Depression, Japan and today. BUT, comparison is not proof. And it does not necessarily follow logically that if some event happened in the past in a particular way it will happen again in the same way.

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i really like SJ' point of view and was thinking that since there is a risk that the market go nowhere for the next 3-5 years, could the preferred shares be the best asset class to hold for this period?

 

Scenario 1 (best case): NYSE is at 15000 in 5 years:

  A bunch of preferred you bought today in a RRSP with a yield of 12-13% is going to give you : 13X5 +  capital gain = 2 bagger 

  A bunch of common (ex: WFC)of those same preferred would probably result in a 3 bagger

 

Scenario 2 ( medium case): NYSE is at 8000-10000 in 5 years:

  A bunch of prefferred you bought today in a RRSP with a yield of 12-13% is going to give you : 13X5 = 1.65 bagger

  A bunch of common (ex: WFC) of those same preferred would probably result in a 0 return

 

Scenario 3 ( worst case): NYSE is at 5000-6000 in 5 years:

  A bunch of prefferred you bought today in a RRSP with a yield of 12-13% is going to give you : 13X5 - capital loss= return of 0

  A bunch of common (ex: WFC) of those same preferred would probably result in a negative return

 

This is really simple scenario that don't take into account reinvestment risk ,the risk of preferred dividend being stopped, and risk of common share dilution..., but can give some kind of guidance

 

 

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I think that comparing the US now to 1930s and Japan in the 1980s misses the following large points: 1) Both the US and Japan had large trade surpluses, little debt and currencies that were at their apexes in terms of strength.  I think the analogy to the UK in the 1930s and 40s is probably more on the mark.  The UK had to pay for the war and we have to pay for the excess consumption.

 

Packer

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